The National Living Wage and the productivity challenge

Research published earlier this week by the Social Market Foundation and Adecco Group concluded that many businesses will struggle to meet the cost of the National Living Wage (NLW). Without a significant productivity boost, many businesses will be forced to cut costs, which, almost inevitably, means cutting jobs.

The trouble is, the businesses likely to be most affected by the NLW are also the ones least likely to have the wherewithal to improve productivity. For example, the severely affected firms are already less likely to train people.

Chart by Social Market Foundation

As Nida Broughton, the SMF’s chief economist says:

The low stock of skills amongst those affected by the new National Living Wage, and the relative lack of access to in-work training, means that businesses and the Government will have to act to make sure that workplace productivity rises alongside the new regulated wage.

If businesses can increase productivity there is less likely to be a risk of higher unemployment as a result of the introduction of the NLW, and workers will be more likely to benefit.

In its report report on the labour market last year, the UK Commission for Employment and Skills noted that Britain has too few high performance workplaces and a long tail of poorly managed firms. Its recent skills report found that, despite inflation and a larger workforce, training investment is more of less the same as it was two years ago.

That low pay and low training investment go together should come as no surprise. Research by NESTA and the Bank of England found that the UK economy is experiencing the opposite of creative destruction. The more productive firms have disappeared and been replaced by less productive ones. In other words, it looks as though some firms have been set up precisely because labour is cheap. It’s Mike Haynes’s Hand Car Wash Syndrome. There are firms whose entire business model depends on throwing a lot of low paid labour at a problem and not investing in skills or technology.

Figures released by the ONS this week suggest that the recent pick up in productivity has slowed down again.

Chart by Resolution Foundation

The gap between the UK’s productivity and the G7 average is the highest since records began in 1991.

Chart from ONS International Comparisons of Productivity, 18 February 2016

Rapid productivity improvements across entire sectors are unusual and this is not a country showing any signs of making them.

What, then, might those businesses that are dependent on cheap labour do as the NLW starts to bite? A few might improve productivity, as the SMF urges them to, but many probably won’t. They will either go out of business or find other ways of taking on workers.  There is, after all, an army of poorly paid freelancers out there who are not covered by the minimum wage.

Talking of which, the employment figures were also out this week. After falling back from its peak in early 2014, the number of self employed people has risen again in the last few months.

Source: ONS Labour Market Statistics, 17 February 2016

You can date the start of the recent rise in self-employment almost from the announcement of the NLW. Still to early to draw conclusions from this, of course. It could just be coincidence….